What happens to my 401(k) (“401k”) when I file for bankruptcy? What about my stock purchase plan?

You keep the 401k and you lose the stock.

When we file bankruptcy, we can exempt (protect) certain assets for you.  One of these assets is your 401k retirement plan.  In truth, most retirement plans are protected in bankruptcy.  We can also generally protect your recent 401k contributions unless they were excessive (if you are wondering what “excessive” means, it doesn’t apply to you unless you just tried to hide a $50,000 inheritance by depositing it into your 401k a week ago).

Some retirements plans are definitely not protected.  This is generally because they’re not really qualified plans under the IRS.  The best example I can think of is a stock purchase plan, such as one at Wal-Mart.  People call it a retirement plan, but it’s really just a stock purchase/matching purchase plan, meaning that you are simply buying stock that I cannot protect when we file for bankruptcy.

So, let’s say that you have $100,000 in your 401k and $2,500 in a Wal-Mart stock purchase account.  On the day we file bankruptcy, we list both.  I exempt the 401k.  Unfortunately, a month later when we meet with the trustee, he’ll order you to sell the stock and give him the proceeds.  He will ignore the 401k.

If this is your situation, then sell the stock before going bankrupt.  Spend the money on exempt items, and use some of it to pay me.

This is not legal advice.  If you need help go to www.robertspaynelaw.com.


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